Wader, a public limited company, is assessing the nature of its provisions for the year ended 31

Fantastic news! We've Found the answer you've been seeking!

Question:

Wader, a public limited company, is assessing the nature of its provisions for the year ended 31 May 2007. The following information is relevant:

(a) Wader is assessing the valuation of its inventory. It has a significant quantity of a product and needs to evaluate its value for the purposes of the statement of financial position. Sales of the product are high, but it incurs high production costs. The reason for its success is that a sales commission of 20% of the list selling price is paid to the sales force. The following details relate to this product:

	$ per unit
List price – normal selling price	50
Allocation of customer discounts on selling price	2.5
Warehouse overheads until estimated sale date	4
Basic salaries of sales team	2
Cost of product	35

The product is collected from the warehouse of Wader by the customer.

(b) Wader is reviewing the accounting treatment of its buildings. The company uses the ‘revaluation model’ for its buildings. The buildings had originally cost $10 million on 1 June 2005 and had a useful economic life of 20 years. They are being depreciated on a straight line basis to a nil residual value. The buildings were revalued downwards on 31 May 2006 to $8 million which was the buildings’ recoverable amount. At 31 May 2007 the value of the buildings had risen to $11 million which is to be included in the financial statements. The company is unsure how to treat the above events. (7 marks)

(c) Wader has decided to close one of its overseas branches. A board meeting was held on 30 April 2007 when a detailed formal plan was presented to the board. The plan was formalised and accepted at that meeting. Letters were sent out to customers, suppliers and workers on 15 May 2007 and meetings were held prior to the year end to determine the issues involved in the closure. The plan is to be implemented in June 2007. The company wish to provide $8 million for the restructuring but are unsure as to whether this is permissible. Additionally there was an issue raised at one of the meetings. The operations of the branch are to be moved to another country from June 2007 but the operating lease on the present buildings of the branch is non-cancellable and runs for another two years, until 31 May 2009. The annual rent of the buildings is $150,000 payable in arrears on 31 May and the lessor has offered to take a single payment of $270,000 on 31 May 2008 to settle the outstanding amount owing and terminate the lease on that date. Wader has additionally obtained permission to sublet the building at a rental of $100,000 per year, payable in advance on 1 June. The company needs advice on how to treat the above under IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.

Required:

Discuss the accounting treatments of the above items in the financial statements for the year ended 31 May 2007.